Comment: Alliance Trust prepares to repel boarders

Another year, another spring – and another disputatious boarding party for Alliance Trust.

Bill Jamieson. Picture: Ian Rutherford
Bill Jamieson. Picture: Ian Rutherford

First Personal Assets, then Laxey Partners – now a New York hedge fund, Elliott Advisors, seeks to clamber aboard. Voices are being raised and letters about to be fired over demands for boardroom seats.

Readers may recall a different era for this £3.3 billion grand galleon, sailing the investment oceans since 1888. Whole decades slipped by when little disturbed the musty passageways of its head office close by a graveyard in Dundee. Shares were registered, the values noted and the dividends clipped. In the boardroom a large clock gave out a slow, somnambulant tick. There was never anything much to write about at Alliance, because nothing much ever happened.

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All this has changed. Revolts and rebellions have erupted as investment performance disappointed and the shares fell to a question-begging discount to net assets: a sure sign of an investment trust well out of favour. Yet as striking as the lacklustre performance has been the failure of successive attempts at radical reform.

Now comes the Elliott requisition proposing the addition of three new directors at the AGM on 29 April. Its claim to be taken seriously is that, over four years, it has built a 12 per cent stake, making it the trust’s biggest shareholder.

Alliance chief executive Katherine Garrett-Cox has already responded speedily and with vigour, urging the trust’s 50,000 investors to reject their proposals that she says would threaten the very existence of the trust.

I spoke at length with Elliott representatives last week and their initial public statements already make clear concerns familiar to Alliance shareholders: the trust has persistently underperformed against its sector peers and relevant benchmarks; its two operating subsidiaries – Alliance Trust Savings and Alliance Trust Investments – have amassed losses of £50 million since launch and continue to be loss-making despite repeated assurances of profits just round the corner.

Meanwhile, management costs continue to escalate, with expenses on continuing operations up from £10.5m to £12.6m.

Elliott also takes issue with the way the investment manager was changed last year, with internal candidate Simon Clements taking over from the short-lived Ilario de Bon without seeking external candidates or a “beauty parade” being held.

To this, Alliance can point to a marked improvement in investment performance in the second half of last year, a total return placing it in the second quartile of its peer group, a 14.9 per cent increase in the dividend pay-out and 48 years of unbroken dividend growth. The ongoing charges ratio has been reduced and buybacks have helped to narrow the discount.

As for the proposed three new directors – Anthony Brooke (ex Warburg), Peter Chambers (ex Legal & General Investment Management) and Rory Macnamara (ex Morgan Grenfell), they may once have been well known in their local spheres but two have little provenance in investment management and their specific proposals for change are not at all clear. Shareholders are in effect being asked to give carte blanche. That is not what conservative-minded Alliance investors are ever likely to do.

That said, clearly all is not well at Alliance, otherwise it would not be attracting these boarding parties. Its investment performance, while not dire, is only just this side of tolerable. And after seven years at the helm, Garrett-Cox has still to establish a clear, recognisable and compelling investment approach and style.

The latest emphasises “sustainability”, to join the suite on gender diversity and low carbon emissions. But sustainability – assuming a definition can be found – is a criterion hard to measure. Will it enhance performance? And how would we know? As for the loss-making subsidiaries, I struggle to understand how the annual report can trumpet “increased brand awareness” while one of the UK’s top five savings platforms still cannot make a profit. Its website is good but could do with refreshment. Alliance has a great name and pedigree. But ATS is like a Meccano set its owners haven’t yet cracked how to assemble.

It all comes down to leadership. But with all the twists and turns in investment approach and methodology – 15 fund managers have come (and mostly gone) since Alan Young stepped down in 2006 – investors are unsure what the approach is, or the priorities.

Alliance long offered an attractive balance between capital growth prospects and a dividend income slightly higher than the FTAll Share. But today the All Share yields 3.22 per cent and Alliance Trust 1.86 per cent: little wonder the shares stand at a near 12 per cent discount.

It could be said that the subsequent years have been a triumph of style over substance. But it is far from clear whether Alliance has yet settled on an embedded style, still less one that delivers an equity return performance better than a plain vanilla equity index tracker. And that is the charge that stings.

Over the next few weeks Alliance investors will be able to judge for themselves whether the Elliott slate has an attractive proposition, or whether this boarding party, too, will be sent packing. But this third assault in five years begs searching questions as to why a great galleon in the investment ocean has struggled to catch the wind in its sails. That is the charge the board has to answer.